Perhaps you are starting a business, and have heard about a popular type of business entity known as a “subchapter S corporation.” What, you may wonder, is a subchapter S corporation, and how is it different than a “regular” corporation? And, is my business eligible?
Legally, a subchapter S corporation is exactly the same is a “regular” corporation (sometimes also referred to as a “C” corporation). Both types of corporations issue shares, they both are run by a board of directors and managed through officers. Both types of businesses also provide the owners – the shareholders – with limited liability protection (in other words, the shareholders in most cases are not going to be liable for business debts).
For more information about limited liability protection, see “What Needs to be Done to Preserve Limited Liability Protection?
The primary difference between a “regular” corporation and a subchapter S corporation is the tax treatment. Corporations that have elected to be taxed as a subchapter S corporations are not taxed at the corporate level. Instead, income is allocated to shareholders, who are then taxed at their personal level. “Regular” (or non-subchapter S) corporations are taxed at the corporate level, and shareholders are then taxed on any dividends distributed.
In addition to the corporate formation, there are certain resolutions, steps, and a tax filing that must be made to establish subchapter S tax treatment. Our firm helps individuals by drafting and filing the appropriate documentation.
Subchapter S corporations are limited in terms of who may be a shareholder, and by other restrictions. Subchapter S corporation shareholders can include:
Shareholders of subchapter S corporations cannot include:
Other Subchapter S Qualifications
Subchapter S corporations are not available if:
Is a Subchapter S Corporation Status Permanent?
The short answer is “no.” If a corporation wishes to sell stock to a person or entity that does not qualify as a subchapter S shareholder, if it is wishes to sell additional classes of stock, or if for any other reason will cease to fall within the requirements for subchapter S corporations, the corporation continues business as usual. The only effect is that after the “disqualifying event” the corporation will be taxed as a “regular” corporation; but everything else about the corporation will remain unaffected.
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The foregoing discusses only a few of the basics for subchapter S corporations. There are many tax and other factors that should be considered before choosing subchapter S corporation status; and generally it will be helpful to set up an appointment with an attorney and possibly a CPA to understand the ramifications of such treatment.
We would look forward to helping you understand whether a subchapter S corporation is best for you.
 For more information, see “S Corporations” by the IRS – https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations